The truly terrible thing about the European crisis is its sheer
This week – last Saturday, to be exact – the Spanish
government announced it would seek help from its European partners. This was not
to be called a bailout package because that would be embarrassing, but a bailout
by any other name would stink as badly.
This was the fourth member of the
European Union to be forced to seek support, the preceding cases having been
Ireland, Greece and Portugal.
Within two days, the list lengthened
further, as Cyprus announced it also needed help, albeit a mere 3 or 4 billion
euro, not the 100 billion that the Spanish said they needed.
who actually follow the unfolding European meltdown, none of this was in the
slightest degree surprising.
The Spanish real-estate boom in the years up
to 2008 was actually more intense and manic than that in the US, on a
comparative basis. The Spanish banking system has been left with huge amounts of
dud loans on its books.
But like in Japan in the 1990s, the government
and regulators conspire not to force the banks to mark these “assets” at
anywhere near their true – i.e., very shrunken – value.
This leaves the
Spanish banking system seemingly functional but effectively “zombified,” meaning
it cannot give new loans to new businesses because its capital is tied up (read
wiped out) in the old ones.
Meanwhile, the Spanish economy has been
spiraling downward because the facade of growth provided for several years by
the construction industry has now crumbled into dust, exposing the bitter
underlying truth: that the Spanish economy is rendered uncompetitive by the
straitjacket of the euro, which has prevented Spain from its traditional policy
of periodically devaluing its currency, since it no longer has one.
the realistic analysts have been saying all along, Spain is essentially Greece
writ large. There are, of course, differences between the two countries, but
they are not big or important enough to alter the key economic facts, headed by
lack of competitiveness.
The same analysts, using the same underlying
analysis, say Italy is part of the same syndrome, writ even larger.
is also a gross oversimplification that overlooks all kinds of differences, so
that mainstream economists – those who work for banks, investment houses,
government and international bodies – can write detailed analyses explaining why
Italy is different and there is little or no danger of Italy being forced to
seek “help.” As for France, it is, of course, absurd to talk about a financial
crisis and the collapse of the French financial system.
But by now, the
pattern of the European crisis is so obvious that no one – perhaps not even the
mainstream economists themselves – believes that the differences are in anything
more than degree and size.
That disbelief was fed in the case of Spain by
the feeling that the Spanish “request” had been imposed on it by the EU ahead of
the Greek (repeat) election this weekend.
The fear, in Brussels and all
European governments, is that the Greeks will elect a government that will
refuse to pursue the course of austerity that the EU has imposed on Greece – and
will leave, or be expelled from, the euro as a result.
In that event, the
capital flight already under way across southern Europe will become an
unstoppable flood of money, and the Spanish banking system will be the first to
By lining up EU help – in an amount much greater than anyone
had previously deemed necessary – the Spanish were erecting a flood
We will know what the Greeks have decided by Sunday night. But we
already know that the Spanish move, which was riddled with legal, financial and
political questions marks and lacunae, did not help Spain – or Europe, for that
matter. European markets shot higher on Monday, but the effect faded the same
day, and by Tuesday there was hardly a trace of it left.
Spanish government bonds, believing that the bailout would “cram them down” –
i.e., make their claims on the Spanish government inferior to the new loans from
the EU – sold their bonds and pushed the yields on Spanish debt higher than
The Irish, hearing that Spain was going to ask for aid without
having stringent conditions attached to it, realized that they should do the
same – and the Greeks perhaps realized that in the game of poker they are laying
with Germany, they actually hold better cards.
Another dramatic week,
then, but when all is said and done, no real surprises.
banking system is bust and cannot be salvaged.
European governments have
either borrowed too much (Greece, Spain, Italy) or promised too much to their
citizens and are unable to deliver on these promises (everyone, including
Germany and the other “strong” countries, but especially France).
efforts will continue, summits will convene, plans will be announced, money will
go from strong to weak nations to repay the debts of the weak to the strong –
but none of this will ultimately help.
The euro is doomed, the EU is
severely damaged and facing existential dangers and the rest of the world will
feel the fallout in many ways, for a long time. Nothing new. Certainly no good